Chapter 4 Regional economic development
4.5 Regional marketing
79 the various roles of leadership are understood. It is also important to map out both internal and external capacity.
Internally, there should be ability to secure in-region resources like money, other related sources such as information and expertise, and also authority and legitimacy. Externally, links are assessed and the extent to which the actors may be able to secure help from national government. Lastly, the implementation experience requires that previously implemented regional projects be revisited for benchmarking purposes.
To summarise: the discussion has outlined what regional governance is and how it entails a partnership between public, private and non-profit leaders. These actors share a common economic vision and work together collaboratively while they maintain a citizen engagement and leverage regional resources. Also noted is the importance of the agenda setting out the goals and purpose of the effort. The actor groups to be involved need to be clearly established, and the group should have the ability to secure resources from inside and outside of the region.
80 occurrence must be anticipated. In this regard, regional marketing plays a role in strengthening the region’s capacity to react and respond to these forces.
Regional marketing demands a market-oriented view of leadership, with local administrators needing to act more like entrepreneurs selling their region (Kero, 2002). It asks what the regional competitive advantages are. It goes further than selling the region to investors; it is also about efficiently creating and fostering long-term relationships. The general goal of local governments is to spur economic growth by attracting and retaining investment. What remains paramount, however, is knowledge of what strategies local governments can use to influence companies’ location behaviour. Government needs to understand the requirements of FDI firms and target policies to satisfy them, with investment incentives and motives being core policies in place marketing (Metaxas, 2010).
According to Toner (2004), government policies have an important role in mediating the benefits nations receive from foreign direct investment. Equally, government policies have an important influence in attracting foreign direct investment or affecting investment-location decisions of multinational corporations. Governments directly or indirectly influence most of the key factors identified earlier as important in attracting foreign investment (Toner, 2004).
There are two types of strategy for regional marketing: exogenous and endogenous. Exogenous strategies are strongly reliant on external regional impulses and foreground the flow and mobility of capital and labour (Kero, 2002). Both economic development incentives and infrastructure development are seen as measures to heighten business activity. Endogenous strategies, on the other hand, centre around local capacity and competitiveness. These are strategies that focus more on available resources and efficiency in their allocation. Efficient regional marketing harnesses and integrates both strategies. Location factors are seen as essentially bundles of products and services that create value for investors. In this way, places and regions become more market-oriented and efficient in economic planning.
Table 4-3 sets out some of the determinants of FDI location, such as quality of infrastructure, quantity and quality of skilled labour, quality of the training system, quality of life, proximity to raw materials, government incentives, wage cost, taxation rates as well as political stability (Toner, 2004).
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Table 4-3 Determinants of FDI Location
Proximity to markets/customers Proximity to suppliers Quality of infrastructure (utilities,
telecommunications, transport)
Legal framework (industrial relations, company and intellectual property laws) Quantity and quality of skilled labour Proximity to raw materials
Quality of training system Proximity to raw materials Quality of life (expatriate managers and staff) Wage costs
Establishment costs (land, construction costs) Taxation rates Counterattack against competitors Political stability Adapted from Toner, 2004
As mentioned in the discussion above, because of global competition, cities and regions are seen as ‘complex products’ that consist of bundled together competitive advantages. These competitive advantages include FDI location determinants, or what is referred to in this study as coordinated investments in regional marketing. These include business climate, image and identity, infrastructure, incentives, capacity building and skills development.
4.5.1 Business climate
Regional marketing has to do with showing investors that the business environment is favourable and enabling for them to set up shop (Kero, 2002). The concept of business environment or climate refers to all the factors external to businesses that either inhibit or favour their development (Hindson & Mayer-Stamer, 2007). The pressures of global competitiveness have seen increasing effort to improve business environments in developing and transitioning countries, with the focus mainly on reducing red tape and improving the regulatory environment.
Improvement of the business environment in a country is seen as a means of promoting enterprise development that ultimately grows economies, increases employment, improves citizens’ welfare and reduces poverty. Efforts to improve the business environment are a response to disappointing experiences with direct support to firms, burdensome regulations, poor service delivery, corruption, and weak entrepreneurial culture. Initially, the focus of these efforts tended to be on the national level – more specifically on national policies, laws and regulations. However, the focus has subsequently scaled down to locality level since it became apparent that undertaking national reforms does not always translate to business environment improvement at the local level.
82 There is a distinction to be made between tangible and intangible locational factors.
The tangible factors include geographical location, availability and cost of real estate, availability and efficiency of transport and communication infrastructure, availability and cost of skilled workers, cost of energy and environmental compliance, and taxes, levies and subsidies. Intangibles from a business perspective include the efficiency of government, the business climate, the availability of related industries and supportive institutions. (Hindson & Meyer- Stamer, 2007:5)
The various sets of business environment factors are set out in Figure 4-2.
Figure 4-2 Factors to consider in a business environment (Hindson & Meyer-Stamer, 2007) Hindson and Meyer-Stamer (2007) highlight an overlap between the business environment and locational quality. This is significant in view of the regional marketing context within which this discussion is taking place. The factors to consider in the business environment are to some extent the same as those needing to be considered in locational quality. For good locational quality, there has to be a good image and identity that has been created for the region in question. This is discussed in the next subsection.
4.5.2 Image and identity
The marketing and branding of cities, regions and countries is positioned firmly on contemporary policy agendas (Boisen, Terlouw & van Gorp, 2011). Because the world has
83 become one huge market, every place, country, city or region finds itself needing to be highly competitive (Anholt, 2007). In modern day settings, people find themselves navigating through the complexity of the modern world with armed clichés that form the basis of their opinions about specific places (Anholt, 2007). For instance, Iraq is about war, Paris about fashion, Switzerland about the best chocolate and most African countries are about poverty, famine and disease. As a result, places have to persuade people in other parts of the world to go beyond the simple clichés and stereotypes and to start understanding the rich complexity that lies behind them (Anholt, 2007).
According to Boisen et al. (2011), the discourse of economic globalisation has resulted in a perceived state of international, inter-regional and inter-urban competition, as these processes have boosted the focus on competitiveness of places. Because of this, an interest has been fuelled in marketing-driven spatial strategies which strengthen the competitiveness of places.
Consequently, every place needs to strive to create a competitive identity for itself. This is a synthesis of brand management with public diplomacy, trade and investment, export promotion and tourism (Anholt, 2007). This is a responsibility of government as the onus is on government to discover what the world’s perception is of its country and to then develop a strategy for managing it. A great image and positive reputation has an advantage for a player on the international stage.
Anholt (2007) says that the reputation of places, countries, cities or regions is like brand images of companies and products; however, he argues that over the years he has spent studying ‘nation branding’, the phrase has become distorted because it seems countries are judged by what they do and not so much according to what they say. This, he says, is not a possibility he has ever seen evidence for. According to Boisen et al. (2011), various scholars have disputed that places are actually competing against each other, with some pointing out that urban competition is hardly global but mostly just limited to nearby cities.
According to Anholt (2007), places embarking on image and brand building should strive for consistency by ensuring that all branding agencies speak in one voice when they carry out their transactions. Government officials, policymakers and commercial and non-commercial stakeholders will then have confidence that a coherent, strong and attractive place brand will help promote the economic development of their city, region and/or country (Boisen et al., 2011).
84 Places need to take a more entrepreneurial stance in relation to branding in order to remain at the top of a region and enhance their attractiveness to the footloose capital, residents and visitors. According to Hall (1999, cited in Metaxas 2010), the concept of branding includes;
a clear and distinct image of the place, which truly differentiates it from other competitors
associations with quality and with a specific way of retailing to the final consumer
ability to deliver long-term competitive advantage and
overall, something greater than a simple set of nature attributes
Branding helps a great deal with the ‘invest ability’ of a place. The emphasis in ‘invest ability’
is on how a locality can be made attractive to investors, and on identifying and dealing with those features of the local business environment that most detract from its appeal (Metaxas, 2010). However, the focus should not just be on the attempt to attract FDI, but also on being able to formulate the proper business environment, in the frame of which the businesses will be able to operate effectively.
A place may have a great image and identity, but ultimately, it will need infrastructure for businesses to set up shop. This is discussed in the next section.
4.5.3 Infrastructure
According to Bakar, Mat and Harun (2012), the impact of FDI and its contribution to the economic growth of any country is quite substantial because FDI increases the domestic capital formation and it also facilitates the transfer of new technology. However, to attract FDI, infrastructure stands out as one of the most important determinants in luring foreign investment, because “investors search for markets where they can maximise the benefits and lower the cost of production and this can be achieved if the infrastructure are in good conditions and supportive to investors” (Bakar et al., 2012).
It is said that in general, it is countries with good physical infrastructure such as communications, bridges, highways and ports that are likely to attract FDI. Even more important is the range of transportation infrastructure required for the mobility of goods (Bakar et al., 2012). Concurring, Shah (2014) stresses the importance of abundant availability of quality infrastructure for the smooth functioning of multinational companies’ affiliate
85 production and trade activities. This is because good quality infrastructure can significantly reduce overhead costs and positively affect investor location decisions.
Infrastructure comprises metalled roads, rail networks, uninterrupted power and water supply, number of sea ports and airports, and telecommunication density approximated with number of fixed line telephones and mobile phone subscribers or internet access possibilities (Shah, 2014). According to Portugal-Perez and Wilson (2012), there is hard and soft infrastructure.
Hard infrastructure includes physical infrastructure which looks at level of development and quality of ports, airports, roads and rail infrastructure. Also in this category is information and communications technology (ICT) which is interpreted as the extent to which a specific economy uses ICT to improve efficiency and productivity and reduce transaction costs. What is important here is availability, use, absorption and prioritisation of ICT by government (Portugal-Perez, 2012). Soft infrastructure looks at the level of efficiency of the customs, business and regulatory environment which assesses the level of development of regulations and transparency. This includes efforts by government to curb corruption in institutions.
According to Rehman, Ilyas and Akram (2010), soft infrastructure is far more important for FDI than hard infrastructure because it provides twice the returns and brings with it economic reforms; the friendlier the soft infrastructure, the higher the inward FDI in emerging economies.
Rehman et al. (2010), in a study on the role infrastructure in the attraction and retaining of FDI in Pakistan, found that infrastructure essentially reduces operational costs. If foreign investors are not provided with infrastructure, their enterprises operate with less efficiency as they have to build and develop their own infrastructure, which then results in duplication and wastage of resources. Poor infrastructure causes an increase in transaction costs and limits access to both local and global markets, which ultimately discourages FDI in developing countries. Rehman et al suggest therefore that greater efficiency can be achieved if infrastructure facilities are extended by considering a provision for infrastructure facilities in contracts and lease frames such as build-to-operate-transfer, builddown-operate and full privatisation. But they also note that good quality infrastructure has impact on FDI as it facilitates export performance, which constitutes a motivational factor for FDI for a country as well as for trading blocks.
Infrastructure also has greater impact on emerging economies as it not only promotes FDI but also ensures a greater return on investment to business owners (Rehman et al., 2010).
86 4.5.4 Incentives
Because of competition, local governments set goals to display their competitive advantages and regional marketing fosters this competition. Competition has also seen local governments make provisions for economic development or business incentives. For some, economic development incentives are good but others see them as a bargaining chip with many limitations and failures. According to Kero (2002), incentive competition ends in a zero-sum game and although there is a positive economic relationship between incentives and local economic growth, it is at the least on a short-term perspective. Kero (2002) appeals for economic development incentives to be properly planned and administered because failure to do this may result in lowered government revenue base.
According to Cheshire and Gordon (1998), there are three types of competitive or incentive policies. The first are a pure waste by virtue of having no discernible impact on diverting activity to the region, although they cost resources. The second are one-sided, in that whatever impact they may have on the economic welfare of the region, they are a zero-sum game from a wider perspective because the investment moves as soon as another place offers better incentives. The third are those whose economic efficiency sees them producing welfare from both the local and the wider perspective.
Peters and Fisher (2004) distinguish between two types of incentive: tax related and non-tax- related. Tax-related incentives include property tax abatements, tax increment financing, sales tax exemptions and credits, corporate income tax exemption and credit for investment on jobs.
Non-tax-related incentives are business grants, loans and loan guarantees. These incentives are systematic changes done explicitly for economic development purposes and their justification is that they lead to business investment and thus new jobs, growth in demand for goods and services and further rounds of economic growth. Furthermore, incentives increase public revenues which enable improved public services or a decline in tax rates.
According to Morgan (2009), each local government decides on the incentives it puts forward on offer. For example, in North Carolina in the United States, the local government offered zoning and permit assistance, infrastructure improvements, cash-grant incentives, one-stop permitting, state development zone, land or building acquisition, site preparation, subsidized land or buildings, subsidized worker training, low-interest loans, relocation assistance, employee screening, regulatory flexibility and incentives for retail projects.
87 Generally, and from an economic point of view, incentives have long been a mainstay of economic development policy but are at the same time a very controversial subject which has been the target of intense criticism (Kero, 2002; Peters & Fisher, 2004). According to Peters and Fisher (2004), the controversy centres on whether economic development incentives are a cost-effective strategy for achieving economic growth. The cost effectiveness is measured through growth of the locality and this growth should be targeted to provide net gains to poorer communities and poor people, because otherwise it is a zero-sum game. A further measure is cost to government of providing these incentives. The controversy also centres around a belief that public officials often fail to assess adequately the net return on the public investment in incentive deals (Morgan, 2009). Other issues are whether or not they actually work and in what the rationale is for using them.
According to Morgan (2009), debate about the extent to which economic development incentives work is also concerned with their legality, fairness, efficiency and effectiveness and with the accountability both in the process of awarding incentives and of their recipients. For the incentives to fuel growth and prosperity, state and local government officials need to understand them in terms of the highlighted five issues. The legalities of incentives require that they serve a public purpose and therefore do not violate the state constitution. Their public purpose is to help create jobs and expand the tax base through which citizens gain increased economic opportunity and better public service. The issue of fairness has to do with who reaps the benefits and who bears the cost of economic development policies – whether it is fair that taxpayers in one jurisdiction subsidize businesses to create jobs that go to the residents of other jurisdictions. Efficiency, speaks to whether incentives are an efficient way of allocating public resources, while effectiveness can be measured according to how they were initially expected to work and what they then realistically achieved. Lastly, accountability asks that incentives be awarded or provided to recipients who will be sufficiently accountable to taxpayers and the broader public interest. Another accountability concern is about how open, publicised and transparent the early incentive negotiations are.
One other important competitive advantage is the availability of a labour force with the right skills for the firms and industries in a region. These are discussed below.
88 4.5.5 Capacity building and skills
One of the best policy practices for attracting and benefitting from FDI is through capacity building and skills development. According to the United Nations (2011), improvement of national skills sets is by far one of the most important policy objectives for both developed and developing countries. In decision to locate the investment in Australia, according to Toner (2004), the quality of the vocational education and training skilled workforce is ranked equal third in importance out of fifteen factors. A nation’s human capital or rather, the level of skills in the local population, is a key determinant of economic development and growth. Because of globalisation, there is a need for workers and businesses to be competitive on a global scale and as a result an enhanced skills base leads to a more attractive investment climate for FDI (United Nations, 2011).
Generally, attracting FDI simply requires the host region to have a relatively open framework for foreign investment and an attractive business climate. However, a host of other factors are considered, such as more targeted policies that provide sufficient access to skilled labour. These include domestic education, training policies and migration policies which enable augmentation of the region’s skills base (United Nations, 2011). Additionally, dissemination policies such as incentives, as discussed above, are considered to partially compensate foreign investors. There is also a regional innovation system that may need to encourage cooperation between local research institutions, foreign investors and local firms to raise the level of skills spillovers.
According to the United Nations (2011), there are complementarities between FDI and human capital. While a strong skills base tends to attract FDI inflows, both transnational and multinational corporations can also contribute to the local skills base through spillovers. These could be spillovers to employees, to local firms, and participation in local education and training institutions. The argument here is that virtuous cycle exists in which the human capital level of the host area, country or region determines how much and what type of FDI can be attracted but also the extent to which the local economy can absorb potential skills transfer (United Nations, 2011) (see Figure 4-3). This is also attested to by Toner (2004) whose argument centres around correlation between existing stock of education and skills in the country and preparedness of foreign investors to invest in further skills upgrade.